Q Ours is a vintage condominium building on Chicago’s lakefront. All units in our building receive hot water from several water heaters located in a basement utility room. When the system was installed several years ago, we were told by the engineer that the design provided redundant reliability such that if one water heater failed, then the remaining heaters could provide hot water to all units even during the weekday early morning shower time. But he also advised that the failed water heater should be replaced as soon as possible to avoid over-working the remaining good heaters.

He explained the redundancy provision in terms of an analogy to an airplane with four engines. If one engine fails, the plane can fly on three engines for a while but the pilot should immediately find a place to land and get the failed engine replaced or repaired. Over the years there have been failures of a single water heater, and the board directed management to replace the failed heater as soon as possible; usually within a couple of days.

There has never been a second failure in addition to the first failure, although there was a year when one heater failed and a second failed a couple of weeks after the failed heater was replaced; it was a close call. A few weeks ago one of the water heaters failed. This means that if a second heater fails before a replacement is installed, then there will not be adequate hot water—especially during peak usage times; for example, early morning time when many residents would be taking showers. Our management company has advised the board not to replace the failed heater until a second one fails. Their rationale is that this will save money even though we have a significant emergency reserve.

Our declaration contains the following language: “The provisions of this Declaration shall be liberally construed [by the board] to effectuate its purpose of creating a uniform plan for the operation of a first class condominium.” If we are a first class condominium, then shouldn't the board direct management to replace the failed water heater as soon as possible? Is our board acting in a reasonable way? Shouldn't they use reserve funds to replace the failed heater as soon as possible and avoid the risk that residents will be inconvenienced by a lack of hot water at critical times, such as early morning shower times?

—Dry on Lake Shore Drive

A “The question the reader poses above is interesting. The legal response is that the board may be acting reasonable,” says Jennifer O’Reilly Schumann, an associate attorney with the law firm of Levenfeld Pearlstein, LLC in Chicago. “Boards are protected by what is called the “Business Judgment Rule.” It is the bedrock of corporate governance and the primary substantive protection available to a board of directors. The Business Judgment Rule is based on the legal premise that decisions made by board members who are fully informed and free from conflicts of interest should be second-guessed by a court. To benefit from the Business Judgment Rule, board members must satisfy their fiduciary duties in the decision-making process.

“So long as board members are (1) disinterested and independent, (2) review and consider all pertinent information reasonably available and, (3) do not act with an improper motive, a court will neither disrupt not hold the directors liable for the results of those decisions, even if the decisions can fairly be viewed by others as “poor business decisions.” Thus, the answer to the reader’s question lies with what due diligence the board did before making the decision not to replace the failed heater. If the board acted in good faith after reviewing costs and all other affecting factors, decided it was in the best interest of the association not to replace the heater, then that decision is not going to be disturbed by a court. The unit owners, however, do have the opportunity to run for the board to voice their opinion and vote on this issue. Unit owners can only attend unit owner meetings to voice their concerns.”